Grocery Outlet is struggling at a time when discounters and value-focused retailers have opportunities to make inroads with price-sensitive shoppers.
The discounter has pointed to a rough technology transition in mid-2023 as the cause of ongoing issues that have posed financial headwinds in recent quarters. But company executives told investors during an earnings call on Tuesday that the company is also facing other challenges, including a lack of effective value messaging and overly ambitious store growth plans.
When it released its fourth-quarter earnings Tuesday, Grocery Outlet announced a restructuring plan underway that includes sharply decelerating its store fleet expansion plans, cutting costly warehouse projects and eliminating dozens of corporate jobs.
Grocery Outlet reported solid results for the quarter, with net sales increasing 11% to $1.1 billion, but investors signaled they see a rocky road ahead for the company.
The grocer’s stock price fell 30% on Wednesday — hitting its lowest point since the company went public in 2019 — following the company’s disclosure that it is slowing its ambitious growth plans and making other significant adjustments in a bid to cut costs and improve its long-term profitability. Over the past five years, Grocery Outlet’s shares have tanked more than 60%.
The discounter’s comparable-store sales growth has steadied between 1% and 4% year-over-year increases during fiscal 2024, but that metric is still below where it was before the COVID-19 pandemic.
Grocery Outlet’s same-store sales growth has wildly fluctuated over the last 5 years
Investors have battered Grocery Outlet's stock price
While Grocery Outlet has been able to grow its overall sales, its bottom line “has gone in entirely the wrong direction,” GlobalData Retail managing director Neil Saunders said in an email to Grocery Dive.
“Part of the [discounter’s] problem has come from relatively soft comparable sales, which are struggling to keep up with cost increases,” Saunders said. “This in turn stems from core customers cutting back because of inflation and some greater levels of competition in the value space.”
Here’s a closer look at some of the challenges Grocery Outlet is facing.
Growing too fast
Grocery Outlet Chairman Eric Lindberg, who served briefly as the company’s temporary president and CEO, made clear on Tuesday that a central problem for the discounter is that it has tried to grow too quickly.
“As interim CEO, my intention was to slow things down, focus on executing the basics really, really well and to reevaluate some of our strategic initiatives that were impacting our execution. We have made great progress on many fronts, but there's still more work to be done,” he said.
While Lindberg underscored that Grocery Outlet still sees the potential to expand to 4,000 locations one day, he said the company erred in choosing where to open stores.
“We know that when we open a new store in an existing market where we have brand recognition and distribution support in close proximity, these stores typically ramp faster than a store in a less developed new market,” said Lindberg. “For new markets, clustering openings and adjacency to existing markets is important for brand recognition, for marketing and for operational synergies”
Lindberg said that the company will focus for the time being on expanding at a more measured pace and sticking to existing markets and “high-priority adjacent new markets” as it looks to invest its capital more effectively.
Grocery Outlet is also looking to reduce the cost of developing new stores, Lindberg said, noting that the company has “experienced increasing pressure on build-out costs.” It will take “some time” to achieve that goal, he said.
Lindberg added that Grocery Outlet also needs to refine its approach to bringing on operators to run stores, adding that the company has recruited operators too quickly. “Selectivity should be the name of the game in drawing in the most capable operators, training them and deploying them successfully,” he said. “This is all about what we're going to execute, what we're going to choose to do so that we can improve the ROIC in the model.”
Ongoing tech woes
The grocer’s transition from legacy systems to SAP technology — a process that started in 2023 — has remained a sore point in its earnings results.
Former President and CEO RJ Sheedy told investors at the end of 2023 that the tech change would provide new capabilities aimed at making the business more efficient. But in the months following the transition, the grocer struggled with poor data visibility, slow system speeds, and a loss of tools and functionality. The impact on ordering and inventory management resulted in less product variety and more margin pressure, and in response, the discounter started giving higher commission payments to its store operators.
Sheedy told investors in August 2024 that the discounter had resolved the last large remaining system issues earlier that year and had gotten warehouse shrink back to normal levels. But last November, Lindberg, who was filling in as interim chief following Sheedy’s abrupt exit in October, said the discounter was still grappling with inefficiencies, including not yet having the real-time ordering guide.
In the Tuesday earnings call, Lindberg, gave mixed responses to investors, saying that “systems are working” but also that the company hopes to have its systems stabilized by the second quarter of fiscal 2025. Lindberg noted that CIO Kumar Mishra “will be instrumental as we continue our systems conversion journey.”
“Our recent financial performance reflects temporary impacts from systems conversions and executional challenges,” Lindberg said about the Q4 results.
Grocery Outlet is facing a class-action lawsuit accusing it of misleading investors about the tech transition’s financial impacts on the business. “We intend to defend the lawsuit vigorously,” Grocery Outlet said in a regulatory filing.
Changing up its value messaging
Grocery Outlet “missed the mark on value earlier this year due to a combination of pricing actions we took to reestablish healthy margins that coincided with competitive pricing that picked up,” Lindberg told investors when the company reported its third-quarter results in November, noting the company focused more on margins than value for the first three quarters of the year.
“[W]e’re beginning to see value move in the right direction,” Lindberg said on Tuesday. The company’s marketing team is working on “a more targeted approach” with messaging for the first quarter that “centers on value and weekly deals,” he added.
Saunders said Grocery Outlet should focus on “low prices and great value” going forward.
The discounter believes its prices contrast well with conventional grocers and are competitive with other discounters but still has “some work to do” on its extreme value items, Dorian Bertsch, senior vice president of strategy and finance, said on the call. High egg prices and inventory shrinkage will continue to pressure margins for at least the first half of the year, CFO Chris Miller noted.
As the company looks to sharpen its value proposition, its new private label line, which debuted last year, appears to be a bright spot. While store brand sales are still a fraction of its overall business, customers have “responded positively,” Bertsch said. The company launched about 180 private label items in 2024 — more than its initial plan for about 100 items — and plans to add approximately 150 more this year, Bertsch added.
Executive turmoil
Another key issue for Grocery Outlet is that several of its top executives have limited experience working for the grocer even though they offer deep collective experience at other retailers. Jason Potter, the company’s president and CEO, assumed the top jobs on Feb. 3, its CFO joined in early January, and its chief information officer and chief operations officer arrived in 2024.
While Grocery Outlet undergoes restructuring, Potter is still getting acclimated to the discounter’s unique business model, which depends on independent operators to translate its vision on a local level. Potter noted during the earnings call that he is still in a “listening mode … to make sure that I have everything I need to make quality decisions on behalf of everyone that touches this business, including the shareholders,” adding that he will look to his prior experience leading The Fresh Market as he settles into his new position at Grocery Outlet.
Potter, who joined The Fresh Market in March 2020 just as the pandemic upended the economy, was at the helm as the specialty grocer introduced new technology and expanded into new markets. He will also be able to draw on more than a quarter-century working for Canadian grocer Sobeys, where he was responsible for 1,500 stores with more than $12 billion in revenue.
Grocery Outlet’s new CFO, Christopher Miller, is also new to his job. Miller, who assumed his position on Jan. 6 and has decades of experience at multiple other companies, is taking over from Lindsay Gray, who ran the company’s finances on a temporary basis after the retirement last year of Charles Bracher.
Saunders noted that Grocery Outlet is contending with multiple problems against a backdrop of especially favorable conditions for the discount retailer sector.
“All of this is very disappointing as the current economic climate is one in which Grocery Outlet should shine. However, others like Aldi are storming ahead while Grocery Outlet is stalled,” he said.
